The US Already Has A Wealth Tax

If we interpret his claim as an additional 0.5% wealth tax do you still think he is overstating his claim?

Capital gains has important differences to wealth tax. It's a tax on net-wealth-disposed-of-in-a-tax-year, or perhaps the last couple for someone with an accountant.

So your proverbial founder isn't taxed a penny until they dispose of their shares.

Someone sitting on a massive pile of bonds won't be paying capital gains tax, but rather enjoying the interest on them.

Most Western countries levy some form of CGT; to avoid it, you'd need to move to a low-tax jurisdiction like Switzerland or Singapore. It's certainly possible for founders and investors to do that, but it's a pretty big life change.

Moving from one US state to another, on the other hand, is pretty easy.

One thing I think that's missed here is that the inflation rate isn't independent of the investment returns. On average, investments generate a certain amount of real returns, so if inflation rises it will tend on average also to raise the nominal investment returns, cancelling out the effect of the inflation-related capgains "wealth tax."

One can avoid a wealth tax by living in another country. One can't avoid the inflation tax on US assets by moving to another country.

He is not overstating.

To summarize the two main points, which other people already made:

• Any wealth tax is on top of inflation. One cannot ban inflation without disastrous economic consequences (or so I'm lead to believe).
• Invested capital tends to appreciate along with inflation, which makes sense if you think about it, otherwise it means it's losing value. Non-inflation adjusted returns on the stock market are much higher when the inflation is high. Also there is no reason not to stash all your money in the safest possible asset to avoid inflation.

I think you made a very good point on why Paul Graham's example in itself is not as strong as it may seem: there are already investors and founders who are paying something similar in the form of inflation and capital gains tax.

I think you also made a not entirely fair comparison: founders of companies and stock investors are not in the same position.

For a stock investor it might not be a such a great difference if you pay your tax in one portion after 15 years or if you pay the same distributed to 15 distinct tax years.*

However, for a founder of a not-yet-public-company this is not the case. Imagine if you own 10% of a startup after you receive venture capital of 100 M USD for 50% of all stocks. That gets your 10% valued at 10 M. Still, it is entirely possible that you have hardly any cashflow and and can barely make ends meet, yet now with a 0,5% wealth tax you owe 50,000 a year to IRS. You have to get that 50k for each year until your company goes public and you can actually sell your shares, which might be 5-10 years down the road, if you ever get there.

*of course, even as a public market investor you would face additional transaction costs of converting your assets to cash when tax payment is due.

Most wealth doesn't get held as money. Inflation in dollars won't make your stocks, real estate or expensive artwork less valuable.

Uh, you can't escape the implied inflation wealth tax by going to a different country, while you could escape a wealth tax by doing so. [Edit: Oops, already said]

Having said that, I agree with you that at .5% it wouldn't make much of a difference, though Graham might be right that even that little is still enough to start people thinking about changing their behavior due to the tax. Also Elizabeth Warran's implied 6% on billionaires accounting for the extra amount charged to cover her healthcare plan would have definitely driven people who were expecting to ever get huge startup wealth away.